Problem 2Marty purchases two goods, food and clothing. He has a diminishing marginal rate ofsubstitution of food for clothing. Let x indicate the amount of food consumed and y theamount of clothing. Suppose the price of food increases from P, to P2. On a clearly labeledgraph, illustrate the income and substitution effects for each of the following scenarios:a) Food is a normal good.b) The income elasticity of food is zero (i.e. Marty's consumption of food does not changein response to his income).c) Food is an inferior good, but not a Giffen good.This question is based on problem 5.9 from Besanko and Breautigam. You can (but don't haveto) assume that Marty's consumer choice problem has an interior solution both before and afterthe price change.

Normal goods refer to those goods whose demand increases with the increase in the income of the…

Answered: Marty purchases two goods, food and…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Slutsky.Consider a consumer with utility function U (x, y) = 2xy. Her income is I = 15, andprices are given by px = 2, and py = 3. Address the following questions:a) Find the demand functions.b) Find the optimal bundle.c) Find the price elasticity of good yAssume the price of good x increases up to px = 3.d) Find the income effect, the substitution effect and the total effect.e) Determine whether the good x is normal or inferiorf) Determine whether the good x is a Giffen goodg) Are goods x and y substitutes, complements, or independent goods? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
Rick consumes 2 goods, Chicken McNuggets (M) with Szechuan sauce (S). His utility function is U(M, S) = M2/3 S1/3 and his income is m. The price of Chicken McNuggets is p, and the price of Szechuan sauce is 1. On the same graph, show the income and substitution effects of the increase in p from 1 to 2 on Rick’s consumption of Chicken McNuggets. Are Chicken McNuggets a normal or inferior good for Rick? Explain your answer.
A consumer is always indifferent between one unit of good A and one unit of good B, no matter how much A or B she consumes. Initially A is cheaper. Then, the price of good A increases, but it is still cheaper than B. Discuss the substitution, income and total effect of this price change.
Sergei splits his consumption between baseball bats and cameras. The price of baseball bats rises. If Sergei responds to this price increase by reducing his purchases of cameras, does this imply that he has a stronger income effect or a stronger substitution effect? Explain. If Sergei responds to this price increase by purchasing fewer baseball bats but more cameras, does this imply that he has a stronger income effect or a stronger substitution effect? Explain.
The income effect of an increase in the price of a normal good that a consumer buys on a regular basis will be ___________ and the substitution effect will be _________.a) positive; negativeb) negative; negativec) negative; positived) positive; positivee) One cannot tell.
Now suppose that income goes up to 15oo. Illustrate how the budget constraint will change. If both goods are normal, explain where the new equilibrium will be (your answer might consist of a region of bundles, rather than just one bundle).
1) Max chooses to purchase movie tickets and restaurant meals every week with his $100. If the price of a movie ticket is $20 and the price of a restaurant meal is $25, then the slope of his budget constraint will be, a) 1/5 b) -1/5 c) 4/5 d) -4/5 2) Marginal rate of substitution(MRS) is the rate at which consumer is willing to trade one good for another. It must be true that: a) MRS is the slope of an indifference curve in reference to a particular bundle of goods. b) MRS is not the same along an indifference curve that is of usual shape. c) MRS is same along an indifference curve that is of usual shape. d) Both a) and b).
Rick consumes 2 goods, Chicken McNuggets (M) with Szechuan sauce (S). His utility function is U(M, S) = M2/3S1/3 and his income is m. The price of Chicken McNuggets is p, and the price of Szechuan sauce is 1. d. Use the equation from part (c) and the budget constraint from part (a) to find Rick’s demand for each of the two goods. e. Suppose m=100 and p=1. How much of each good does Rick consume? Draw a graph showing Rick’s budget constraint and indifference curve passing through his chosen consumption bundle. f. Suppose m=100 and p=2. How much of each good does Rick consume? On the same graph from part (e), show Rick’s budget constraint and indifference curve passing through his new chosen consumption bundle.
A consumer's weekly income is $5000, the price of a cell phone is $1250, and the price of a watch is $500. What quantity of cell phones and watches will maximize the consumer's utility if they spend their entire weekly income on cell phones and watches? Explain your using I. answer marginal Suppose that this consumer's income elasticity for watches is analysis. 5.4. what does this indicate about watches? If the cross-elasticity calculates to 0.8 what does this indicate about the relationship between watches and cell phones?
David perceives canned tuna (Y) as an inferior good and fresh tuna (X) as a normal good. If his income increases by 100%, and his income elasticity of both types of tuna is 1. Show the effect of this increase in income on the change in his optimal choice of canned and fresh tuna, highlighting his income-consumption curve. Clearly label your graph. Reflect the proportional changes in your graph.
For Sara, ramen noodles are a normal good, however Sean considers ramen noodles to be inferior. If Sara and Sean have the same amount of income, Sean's demand for ramen noodles will be less price elastic than Sara's. Please explain why in detail using the substitution effect and income effect graphs.
PROBLEM 3 – Slutsky Equation, Income Effect, Substitution Effect, and Total Effect There are two goods which quantities are to be denoted by x and y, while prices are denoted by px and py, respectively. There is a consumer whose income is to be denoted by I and utility by u. His expenditure function is known to be: *see image* Using slutsky equation, decompose the effect of an infinitesimal increase in Px on demand of good x.

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